Special Report: Power of Pay

NEW YORK: Elizabeth Guider examines the issues at stake in the thriving global pay-TV business.

Recessionary woes are (finally) abating, advertising has picked up, new gizmos and apps are proliferating at warp speed, and M&A activity is gathering steam. In February, Comcast stunned the U.S. media business by snapping up Time Warner Cable for $45 billion, setting off a rethink among its rivals and partners as to how the media landscape will be altered and what other deals might be warranted in response.

Shortly before that bold move, several other U.S. companies, most notably Discovery Communications, AMC Networks and Liberty Global, stepped up their amassing of or disposing of assets on the foreign front. Low-level chatter suggests that other interesting international targets may be ripe for either a buyout or a bulking-up—think Scripps Networks Interactive or Central European Media Enterprises—in order to stay in the running in this increasingly frenetic fray. “How big is big?” is a newly open question among media mavens, regulatory agencies and consumers in the U.S. and beyond.

American players are, and will be, in the thick of transactions abroad as their movies and TV shows—from Gravity and Frozen to NCIS and The Mentalist to The Amazing Race and Ice Road Truckers—continue to be in worldwide demand and as the growth potential of some of their Stateside businesses continues to shrink.

“The U.S. is arguably a mature market, but there’s still plenty of opportunity and a lot of growth in emerging and established foreign markets,” says Sean Cohan, executive VP of international at A+E Networks. “Through the recession, even with geo-political problems here and there and even with viewer habits changing, there are more subscribers to cable services today than yesterday and more advertisers lining up to chase them.” Cohan stresses that activities abroad are “a material contributor” to and “a growth engine” for his company.

While the bread-and-butter business of licensing individual series and movies to stations outside the U.S. shows no signs of drying up (though it inches up only a few notches each year revenue-wise), the international channels business is by various measures still in expansion mode. (Carriage, for example, is still limited for many in France, Scandinavia, China and parts of Central Europe, to mention only one metric.) 

House of Cards on Netflix aside, it’s the shows on cable, whatever the tier—like The Walking Dead on AMC, Homeland on Showtime, Game of Thrones on HBO, The Americans on FX—that are considered the coolest around, and not just by audiences in the States. Dangling these and other niche sensations as a come-on, the Hollywood players who control the copyrights have adroitly built entire channels around them, slotting in locally accessed fare in select territories and rounding out their schedules with back catalogue.

The stats embedded in periodic press releases or the Hollywood studios’ annual reports are head-scratchers: service X boasts a footprint covering a whopping 190 territories, service Y touts a reach of 400 million households—reporters on the beat stopped responding to such figures long ago as “not information-feeding.”

More eye-opening, or at least less opaque, have been occasional news flashes: Viacom’s Colors  joint venture rising to the top with its Hindi-language lineup against established players in India; FOX International Channels’ The Walking Dead drumming up record chatter on social media about (and boffo ratings for) its day-and-date global drop.

TRAILBLAZERS
Indisputably, Hollywood’s international channel powerhouses have made substantial inroads around the world since the first intrepid pioneers—CNN, MTV and Discovery among them—had the chutzpah back in the mid-1980s to clamor for the satellite technology that could facilitate the launch of wholesale channels to audiences around the world. They were betting that a round-the-clock diet of American content (much of it reruns in those early days) would enthrall audiences abroad and that their distracted bosses back on the studio lots would—despite start-up costs and five or more years’ time needed to break-even—support such gambles.

Impressive that.

And nowadays? Most analysts hesitate to generalize about the health of the entire sector because key providers of content boast various degrees of carriage overseas, bank on different mixes of subscription and advertising, and conduct their foreign affairs in ways peculiar to each. There’s also the looming specter of so-called cord-cutting, which many pundits theorize will some day—some day—turn the entire content business over to the likes of Amazon, Google, Netflix and their own upstart rivals.

EVALUATING THE ASSETS
Those who would opine on the subject of fungible financials variously suggest that somewhere between “25 percent and 50 percent” of any given Hollywood studio’s revenues from the international TV business come from the channels’ side—one of them noting that, if it weren’t such a lucrative area, “why would Discovery have forked over $1.7 billion for those SBS channels in Scandinavia and why would AMC Networks have plopped down a similar sum [$1 billion] for Chellomedia’s outlets?” 

And that’s not the only complication in assessing the sector.

“Every country, every region, is at a different evolutionary stage in its media development,” Andy Kaplan, the president of worldwide networks at Sony Pictures Television, points out. “No one size fits all in describing the state of the industry—and the U.S. is not necessarily a predictor of what’s next in any given territory.”

Furthermore, some territories were impacted more severely than others in the last five years by the worldwide recession, making generalities about churn or ad-buying dips even more spurious.

In short, none of the key entertainment programmers—from Sony and FOX to Time Warner and NBCUniversal—break out or provide numbers specifically related to the cash they rake in from their foreign channel operations. But no one doubts that the most established players mint considerable moolah from those efforts. 

Among analysts unconnected to the Hollywood heavyweights, estimates hover in the $7.5 billion to $10 billion range for the annual revenues accruing to the sector, which help explain why almost all top studio execs routinely tout “the growth of international” in their formal comments to shareholders.

As a recent media report from the research firm PwC argued, the value of entertainment content keeps rising and those companies blessed with sizable libraries and an ongoing production machine are in an enviable position. It’s what decisions they make from that perch that determine their relative success in the global sweepstakes.

EARLY BIRDS
Kaplan believes his company was among those that enjoyed a “first-mover advantage” by being early to the channel chessboard, especially in India, where Sony Entertainment Television (SET) has become a front-and-center contender, and in a key western European territory like Spain, where AXN has become a powerful brand.

Others, like Bruce Tuchman, president of AMC/Sundance Channel Global, or A+E’s Cohan, whose companies jumped into the foreign fray at later junctures, believe they are helped by not being burdened with “legacy issues” and by coming into the arena with mindsets already shaped by the new ways consumers are accessing media and by new technologies they are increasingly demanding.

“I think we’re seeing a benefit in being relative newcomers,” Tuchman says. “From the get-go we can emphasize a model that’s designed to respond to new consumer demands.”

His biggest challenge this year, though, will be to rationalize and integrate the various channels (lifestyle, cooking, horror and sports among them) acquired in the Chello deal into a coherent package alongside his AMC portfolio. Regarding the purchase, Tuchman says the move will help his company “diversify its revenue stream and give us an expanded platform on which to operate.”

Despite their differences, most Hollywood executives responsible for channel operations overseas are bullish about the state of their business and relatively sanguine about their ability to stave off cord-cutting or other yet-to-be adopted consumer practices that might undermine their success—through to, well, “the mid-term,” whenever that might arrive.

Not that these executives are dismissive of the need to be on top of every new wrinkle in the windowing of their content, both to respond to new audience viewing habits and to avoid cannibalizing more established distribution pathways or snuffing out fledgling ones.

WATCHING WINDOWS
Belinda Menendez, who as president of NBCUniversal International TV Distribution and Universal Networks International oversees both old- and new-style distribution at her conglomerate, describes the juggling act as “both a challenge and an opportunity for us to continue evolving our ‘TV Everywhere’ strategy through expanding EST [electronic sell through] and VOD. We are focused on meeting the growing expectations of our viewers, who want to be able to access content from a variety of sources, beyond linear.”

Beyond their management of ever-more-thinly sliced or overlapping windows, these executives are, in different ways and to different degrees, adamant that the secret to a competitive edge lies with getting the balance right between the American fare (much of it owned in-house) that underpins their services and the original or locally acquired shows in any given region that spice them up.

In other words, to beam or not to beam abroad is not the question. Rather, the challenge is figuring out what size matters, how large and varied a bouquet one needs to be part of, and how wholesale distribution via those pipelines can complement the more traditional (and still highly lucrative) piecemeal licensing of shows to key national broadcasters.

One thing is certain. None of these top players believes being a standalone is a good long-term strategy unless that single channel has inordinately strong brand awareness and measurable appeal, à la a Disney Channel or an HBO.

PORTFOLIO PREFERRED
“It’s like going to a party alone,” says A+E’s Cohan. “With just one channel, you have poor economies of scale and less leverage with both customers and advertisers. However, with too many offerings there’s a risk of a diffused effort and a blurring of brands.”

Cohan’s company, which began its march abroad back in the mid-1990s, fields its three key U.S. ser­vices—HISTORY, A&E and (more recently) Lifetime—in various combinations, most everywhere, and sometimes in conjunction with three other owned services, LMN, FYI (launching in place of Bio this summer) and Crime & Investigation Network.

“Not surprisingly, there’s an almost universal demand for HISTORY, so we’re sold out in virtually every market with that brand. We’re increasingly bullish and aggressive with our other services, too,” Cohan says. To his mind, China and the so-called “-stans” are the hardest markets for U.S. channels to crack. Most importantly, Cohan adds, is that the company, jointly controlled by Disney and Hearst, is focused on producing and owning its own programming, a goal shared by virtually all his colleagues at other studios.

“The thing that we bring to the table that is very helpful—I think it’s our single most important competitive advantage—is that we’re producing nearly 2,000 hours of original programming each year in the food, travel and home categories,” Jim Samples, the president of international at Scripps Networks Interactive, recently told World Screen about the success of Food Network, Travel Channel and Fine Living in the international marketplace. “There’s no other program group in the world that is so focused on those three categories. We own almost all of that content and all of the rights associated with it in high definition. We’re able to bring that to the distributors and be very innovative in the way we’re providing them with HD content and giving them ancillary rights for digital, for video on demand, and so on. We don’t have to have those internal negotiations to seek out those rights—we can act quickly.”

Similarly, Tuchman emphasizes that the intention of the AMC services is to acquire and hold on to more program rights. He points to Rectify as an example of a drama series that premiered on his channels in a first window. “That’s important in strengthening a brand—as is our recent deal to acquire key first-run windows on a half-dozen indie film titles straight out of the Sundance fest.”

Somewhat differently, Simon Sutton, president of HBO International and content distribution, puts the emphasis on nurturing “the aura of HBO domestic.” Though the channel might be exhibited differently in Poland or in Mexico, for example, what is emphasized is that HBO is “a place of mind—cutting-edge, aspirational,” Sutton argues.

IT’S NOT TV
In some key territories, HBO has opted for long-term output arrangements for its movies and series with established satcasters who offer their own upscale service—Sky in the U.K. among them—rather than running a standalone channel operation of its own.

In most places where the Time Warner-owned paybox is beamed, especially in Latin America where it’s often flanked by channels from sister division Turner Broadcasting, Sutton continues, the brand has “a lot of oomph behind it.” He points out that HBO International doesn’t compete for ad revenues but has seen its overseas subscriber base grow significantly, now topping out at around 90 million. (Of its recently reported 2013 revenues of $4.9 billion, one analyst hazarded that upwards of $1 billion could be attributed to the paybox’s international business.)

When asked what’s next for each of their companies, several executives emphasized the further refinement of their program mixes, which vary considerably from region to region and by how much time and money has been spent on fostering local production efforts. Obviously, substantial investment is required to roll the dice on localized content in foreign climes, but there are notable success stories to point to.

Longtime player Sony, for example, boasts an almost entirely localized operation in India—and, per Kaplan, that territory now accounts for a considerable part of the division’s revenues. Kaplan also notes an unexpected surprise bonanza with Korean programming that Sony is beaming across Southeast Asia on its ONE channel. “Some of our guys in the region identified an underserved segment of the audience, so we zigged while others zagged. And it worked.”

By contrast, HBO International relies mainly on its movie vault and home-grown hits like Game of Thrones, but will increasingly be focused on working with “like-minded producers abroad.” Case in point: a three-part miniseries directed by Agnieszka Holland set in Czechoslovakia called Burning Bush, which centers on that region’s Communist past and was not the kind of material, Sutton says, that local broadcasters were routinely taking on.

The trick, says NBCUniversal’s Menendez, is “to focus on launching distinctively positioned global brands that satisfy both subscribers and affiliate partners—including layering in locally relevant programming, managed by local teams.”

Take the transmedia property Defiance, which enjoyed a day-and-date premiere in April 2013 on multiple Syfy channels following the U.S. launch. “Not only was it distinctive content for the brand, but we offered it to multiple markets at once,” Menendez explains. And, in the U.K., a second-screen viewing app, Syfy Sync, coincided with the worldwide launch. Created for both iPad and Android tablets, the app served up what Menendez calls “exclusive content synchronized with the channel’s linear content, offering an immersive, interactive experience.”

BRAND PLANS
Meanwhile, FOX International Channels has taken to heart the lessons it learned from its experience with The Walking Dead, says Sharon Tal Yguado, executive VP of scripted programming. “That phenomenon made us plan for more such launches and for more shows that are cinematic, loud, strong on character, serialized—and have stickiness.” While her division did a pre-buy on the zombie series as well as on Da Vinci’s Demons and The Bridge, increasingly, she says, the idea will be to do these kinds of shows in-house, beginning with another series from The Walking Dead’s Robert Kirkman called Outcast.

Tal Yguado is also in favor of limited series—like 24: Live Another Day, Wayward Pines and Cosmos—which she is betting will lend themselves well to her channels overseas. “What’s better than an extended movie?” she asks rhetorically. “It elevates the quality, and that’s what everyone is after.”

As for local production efforts which have hit big numbers, she points to a much-buzzed-about series in Latin America called Cumbia Ninja, which combines romance, music, Kung Fu and gangsters. 

Per their forecasts of things to come, Tal Yguado and others suggest we’ll see more such cross-border, transmedia efforts as the chief cable contenders accelerate their role in what is becoming an increasingly high-energy game of content creation.